Princeton University Professor Angus Deaton has won the 2015 Nobel Prize in Economic Sciences, and it is a very worthy award. The 69-year-old Scottish-born economist has contributed to our understanding at a theoretical, empirical, and policy-relevant level throughout his very productive career. And he continues to challenge his fellow economists methodologically, analytically, and practically with new works. In many ways, this was a very inspiring choice.
Let me explain. Deaton’s first main idea was the basic one that people don’t eat growth rates: We learn a lot more from studying consumption behavior than we would from focusing our attention on aggregate income measures. It is a decidedly microeconomic approach to empirical analysis, and in so doing he innovated ways to conduct household surveys. And this way of measuring human well-being opened eyes to the plight of the world’s poor, and the economic improvements in global development. In many ways, Deaton’s work provides the scientific underpinnings of Hans Rosling’s BBC Four video, The Joy of Stats, on 200 countries, 200 Years or his TED Talk on the washing machine.
Deaton’s work made us see the impact innovation and development has had on the well-being of the world’s poor. In this sense, his receiving the Nobel is also a nod by the committee to economic history and the fundamental importance of development economics as a field as much as to the theoretical and empirical thrust of Deaton’s work on consumption behavior.
In addition to being a thorough thinker, Deaton is a bold one, and does not shy away from taking controversial positions. In his very accessible “The Great Escape,” he explains that the rising incomes of American CEOs may not be at all due to a culture of overpaying themselves, but a consequence that in the global marketplace, top English-speaking managers may be more like superstar opera singers or athletes, where the compensation reflects returns to super-sized talents in this new global marketplace.
Moreover, he explains that for studying questions of global inequality, the top 1 percent in any one country is the wrong way to think about the issue. In tackling the issue, what matters is not within-country inequality, because the decisive factor in global inequality are the differences between countries.
The factors determining between-countries differences include size, talents, and restrictions on opportunity. And while within-country inequality may invoke political action, what effective measures could be done globally? There is no world government, and global institutions such as the World Bank possess neither the authority nor the ability to implement a global tax and redistribution policies.
The fact that the world is a better place than it ever has been is due to innovations and the expansion of trade and mobility. People across the globe are wealthier, healthier and live longer and happier lives. Deaton is neither a free-market fundamentalist, nor Panglossian about global economic development; there have been major setbacks in terms of disease, and natural and man-made disasters that have fallen on the world’s poor. A billion people still live in conditions of destitution, and millions of children still die due to the accident of their birthplace.
There is something policy-wise that can be done about this, especially with regard to global health. But foreign aid programs since World War II have not provided the answer as to how to help the least advantaged and most vulnerable among the world population.
Foreign aid faces a dilemma: If extreme poverty is a result of poor institutions and bad politics, giving money only sustains that offending government. If a country has the conditions for development in place, then aid is not required — trade and foreign direct investment will provide the resources for development. If a country is hostile to economic development, then aid will be ineffective and perhaps even harmful by propping up bad regimes.
Deaton, thus, falls more or less on the P. T. Bauer/William Easterly spectrum of thinking about the effectiveness of foreign aid to address the problems of facing less developed economies as has been practiced to date. But his is not a wholesale rejection of foreign aid. We just have to rethink the project and learn how to do it more effectively. As he wrote in a 2013 essay, “Weak States, Poor Countries”:
“The absence of state capacity — that is, of the services and protections that people in rich countries take for granted — is one of the major causes of poverty and deprivation around the world. Without effective states working with active and involved citizens, there is little chance for the growth that is needed to abolish global poverty.”
Unfortunately, the world’s rich countries currently are making things worse. Foreign aid — transfers from rich countries to poor countries — has much to its credit, particularly in terms of health care, with many people alive today who would otherwise be dead. But foreign aid also undermines the development of local state capacity.
Critical to Deaton’s thinking is the building of state capacity. In this sense, his work echoes an important theme of another Nobel Prize winner Douglass North, when North claimed in “Structure and Change in Economic History” (1981) that the state was both the greatest impetus for economic development and the greatest impediment.
In an essay published this past summer commenting on Easterly’s “The Tyranny of Experts,” Deaton agreed that “technological illusions” of development planners must be rejected. But Deaton also cautions that while development policy should, of course, respect the rights of the poor and encourage their participation in the democratic process of their own governments, it is a case of over-optimism and wishful thinking to believe that rights and democracy naturally lead to growth and prosperity.
Deaton’s position on these issues is perhaps best summed up in “The Great Escape”: “What surely ought to happen is what happened in the now-rich world, where countries developed in their own way, in their own time, under their own political and economic structures. No one gave them aid or tried to bribe them to adopt policies for their own good. What we need to do is to make sure that we are not standing on the way of the now-poor countries doing what we have already done. We need to let poor people help themselves and get out of the way — or, more positively, stop doing things that are obstructing them.”
Angus Deaton has advanced our understanding of wealth, health and well-being through detailed empirical examination of household consumption data and theoretical insights from microeconomics to political economy. The Nobel Prize committee chose wisely this year.